Fantastic Plastic?

Tempted by all those credit card offers? Here’s what you need to know.

Steve was working on a term paper when a credit card company called his Brigham Young University dorm. The company was offering cards to students and wondered if he would like to apply. Happy to take a break from studying, Steve agreed to answer a few questions. He told the representative he was on scholarship and had no income. Since he planned to serve a mission at the end of the year, it would be a long time before he graduated and began a career. I’ll never get approved, Steve thought as the conversation ended. To his amazement, he received a $2,000-limit credit card a week later in the mail.

Teens and college students like Steve are an attractive market for credit card companies, according to Catherine Williams, president of a nonprofit organization that offers credit card counseling. If you are nearing your 18th birthday, you may have already received an enticing credit card offer or two in the mail. Some companies offer discount airfares, while others give away free T-shirts for filling out an application. Whatever the incentive, credit card companies aggressively seek youth because they want to establish brand loyalty early.

What is credit, anyway?

Since you have to be 18 to qualify for most credit cards, what does this have to do with you? Elder Marvin J. Ashton (1915–94) said, “Proper money management and living within one’s means are essential in today’s world if we are to live abundantly and happily” (Liahona, Apr. 2000, 44) If you have a job, you may have already been able to budget and establish wise habits like paying tithing and saving money. When you turn 18 or leave for school, owning a credit card might seem like the logical next step in your financial education. But you need to know the basics first. “Before you decide to get a credit card, you need to know the facts. You need to know what’s out there,” says David Ogden, chairman of an Internet company that offers advice to students about credit cards.

First of all, he says, it’s important to understand how credit works. A credit card is basically a monthly loan, usually with a grace period to pay back the money borrowed. Each card has a limit, or maximum amount of money you can spend with that card. With most companies, you have until a certain date each month to repay your purchases before they start accruing interest.

Let’s say you purchase $80 worth of books one month and pay off the full balance early. You owe the credit card company nothing. Sound like a good deal? In many ways, it is.

Avoiding debt’s pitfalls

The problem with credit cards arises when you can’t pay your entire monthly bill. Credit card companies make money by allowing people to make minimum payments and charging interest on the rest. For example, instead of paying off your entire $80 bill, let’s say you make the minimum payment of $20. From the due date forward, you must pay interest on the remaining $60. This can add up quickly. Having a debt on your credit card is like agreeing to give someone a bigger and bigger portion of your paycheck each month. The amount you owe the credit card company will increase until you pay off your full balance.

Credit card debt can get out of control, causing heartache and deep financial troubles if unchecked. President Gordon B. Hinckley has said, “Debt can be a terrible thing. It is so easy to incur and so difficult to repay. Borrowed money is had only at a price, and that price can be burdensome” (Ensign, Mar. 1990, 4). Steve learned this lesson the hard way. For the first few months he had his credit card, it stayed in his wallet. But in the last three weeks of his freshman year, Steve went on a spending spree. “After a year of living on a few hundred dollars a month, I decided to go have some fun,” says Steve.

With his credit card he paid for weekend trips and new clothes. By the time he went home, he had racked up charges nearing his credit limit. As a result, he spent the summer before his mission working frantically to pay off the debt. “It wasn’t a positive learning experience,” says Steve. “At the time, I didn’t realize that a credit card doesn’t expand your income now; it shrinks your future income because of debt.”

Wise credit card use

Owning a credit card doesn’t automatically put you in a situation like Steve’s. A credit card is just a form of payment and, if used responsibly, can be a helpful tool. Having a credit card and paying your bills on time establishes good credit, which will be handy in the future if you need a loan to purchase a car or home. Credit cards also allow you to make big purchases, like all your books for the semester, without carrying around large amounts of cash.

The trick to using a credit card is to realize it’s not free money. “A credit card is not an extension of your income,” says credit counselor Catherine Williams. She says youth with credit cards need to establish a monthly budget and decide what part of that budget can be used for credit card purchases. To stay out of trouble, Williams recommends starting with one low-limit credit card with no annual fees. And she says paying off the balance each month is an absolute must.

Bekah Swiss, a 19-year-old from Sandy, Utah, applied for a credit card specifically to build a good credit rating. To make sure she stays out of trouble, Bekah and her parents have set some guidelines. She says she will never make a credit card purchase unless she has the money in the bank to pay it off immediately. That way, she won’t pay a cent in interest. “The money some people are paying in interest could have been put in a savings account. Then it would earn them interest,” says Bekah.

Credit cards aren’t for everyone. Melinda Blunt from Tucson, Arizona, decided to leave for college without one. “I don’t feel the need for a credit card because the things that I need I can pay for up front with a debit card. That way, I don’t have to worry about debt,” she says. Melinda hasn’t ruled out getting a credit card in the future. She says she may get one to establish good credit.

Understanding credit and establishing good financial skills will set you on the right path. Becoming financially savvy means learning to live within your means and to save a little, as well. Elder James E. Faust has said, “It is important to learn to distinguish between wants and needs. It takes self-discipline to avoid the ‘buy now, pay later’ philosophy and to adopt the ‘save now and buy later’ practice” (Ensign, May 1986, 20). A credit card is a convenient way to pay for things, but it won’t bring you more money or pad your savings account. If you expect it to, you’d better wait and store those offers for cards with free T-shirts and discount airline fares in a safe place: the garbage.

Credit Card Savvy

  • With your parents, shop around for a credit card with a low interest rate and no yearly fees. Credit card companies that aggressively solicit students often have high interest rates. The bank where you have your checking account is often a good place to find a card with a lower rate.

  • You can make payments on your credit card anytime, including before you receive a bill. Paying off your credit card early helps reduce the risk of missing a payment.

  • Pay the monthly balance in full, period.

  • Avoid getting cash advances on your credit card. These have no grace period and have an average Annual Percentage Rate of 19.56 percent, according to a 2000 Internet survey.

  • Keep all of your credit card information in a safe place. If you are moving for the summer, make sure the credit card company knows the address to which the bill should be sent.

Credit Card Safety

  • Sign the back of your credit card as soon as you receive it.

  • Never let anyone borrow your credit card.

  • If your credit card is lost or stolen, report it immediately. You are only responsible for $50 of unauthorized purchases, and you are not responsible for any unauthorized purchases if you report the card missing before they are made.

  • Go over your monthly bill carefully to make sure all the charges are correct.

  • If you need to contest a billing, call the company’s customer service number.

  • If you decide to discontinue using the credit card, simply cutting it up isn’t enough. You must call the company and cancel your account as well.

[illustrations] Illustrated by Scott Greer

Debt Load

Rationalizing their way into debt was easy. Getting out was tougher.

Melissa got her first credit card when she went away to college. Her parents, who helped her apply for the card, told her it was for emergency use only. At first, Melissa followed that advice closely, usually consulting her parents before she made any purchases on the card.

“At first, I didn’t use my card all that much,” she says. “The problem was, my parents didn’t really explain how credit worked. In fact, I saw my mom use her credit card all the time to buy things at the store. She never thought to tell me that she only bought things she knew she could pay for in full every month when the bill came.”

Married while she was still in college, Melissa and her husband soon longed for the comfortable lifestyle they had enjoyed at home with their parents.

“We felt that we deserved most of the things we purchased with our credit card. We never stopped to consider if we could afford it.”

Soon Melissa and her husband were charging necessities like groceries and gas for the car on credit cards because all their available cash was used up paying the minimum balance on several credit cards. Finally things were so bad that Melissa sought help from her parents.

“It was really embarrassing to have to go to my dad and tell him what we had done. We were really lucky that my dad was in a position to help us.”

But even with help and new knowledge about how credit works, it hasn’t been an easy road, says Melissa. In addition to having to check in with her dad for several months after he bailed them out, paying the loan back to her father has meant several years of a very restrictive budget. But Melissa says the sacrifice has been worth it.

“I felt like I was in prison before. Now, even though I don’t have as much money to spend, I feel a real sense of freedom. Getting out of debt is worth whatever it takes.”